The COP26 climate talks last month in Glasgow may not have been as far-reaching as the 2015 conference in Paris. But there was clear progress made in some areas, experts say, and the talks and agreements underscored a few important points, including that the world needs more climate finance, and that asset owners and asset managers need much better access to data than they have now.
Improvements in data and reporting are underway, experts say. But far more needs to be done, particularly as a growing number of companies, governments and others announce plans to shift their operations and economies to net-zero.
“Investors need data about climate exposures that can help them reallocate capital toward climate solutions,” Linda-Eling Lee, managing director and head of ESG & climate research at MSCI, says in a post-COP26 report. Such data is also crucial to help prevent greenwashing and to retool the global economy to put it on a pathway to net-zero.
One thing that was already clear, it’s going to take a lot of effort if companies, investors and economies are going to get to net-zero. “We can’t simply divest our way to net-zero,” Lee says. “Nearly every company needs to retool its business, or be replaced by new businesses better adapted for a net-zero economy.”
Just as vital is to reduce carbon emissions now — rather than setting a 2050 target and not planning significant reductions until 2040 or later.
Happily, there’s evidence that more companies are indeed committing to reductions now, according to Meggin Thwing Eastman, global ESG editorial director and head of ESG research for EMEA at MSCI. “More and more asset owners are committing to shift their investments to net-zero,” Eastman tells CleantechIQ. “A large number of them have done so under the Net-Zero Asset Owners Alliance,” the UN-sponsored program that is providing a “target setting protocol” that requires members to set a five-year carbon reduction target, putting them on a definitive path to climate neutrality by 2050.
Other net-zero groups and alliances are also working to create their own similar protocols to get companies to reduce emissions now. Such intermediate targets are a good way to help guard against greenwashing, which Eastman says remains a “key risk.”
But for investors to ensure their portfolio companies are indeed progressing toward net-zero, and not just making empty claims, they will “need measures that look forward and that can calculate companies’ complete carbon footprint,” Lee says. “They’ll also need measures that can adjust to reflect actions delivered by companies (or not) compared with their intentions.”
That is where data and standards play a vital role, which is why MSCI is one of a growing number of organizations calling for “mandatory reporting of core climate data,” Lee says. Such reporting needs to be done across the economy, she adds: “It won’t help for only the leading companies to raise the bar on reporting without rules to bring up the laggards.”
Concurrent with better data and disclosure is the need for “reporting standards that harmonize globally,” she adds. To that end, just before COP26, the Task Force on Climate-Related Financial Disclosures released its own new and improved guidelines, an updated version of the TFCD’s 2017 disclosure guidelines. And at the conference itself, the International Financial Reporting Standards (IFRS) Foundation formally launched the new International Sustainability Standards Board.
The aim, the Foundation says, is to “deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities.” Its launch was a “key event” at COP26, Eastman says, adding: “We should watch this space closely, because these are the standard-setters.”
Indeed, the formation of the ISSB was a “meaningful gain,” Simon Hallett, partner at Cambridge Associates, tells CleantechIQ. “A stumbling block for companies reporting targets and investors holding them to account has definitely been the lack of a commonly accepted framework,” he says. The new standards will also make it easier for governments to mandate climate disclosures, he adds.
Despite such positive steps, experts say COP26 in general was mostly middling.
“Overall, we don’t see COP26 as being particularly game-changing from an investment point of view,” two Schroders executives — lead portfolio manager Simon Webber and global sector specialist Isabella Hervey-Bathurst — write in a post-event report, while noting some positive take-aways from the event.
PIMCO executives Scott Mather and Gavin Power attended COP26 as delegates and, in their own post-event report, put a positive spin on things. The conference was “neither a grand success nor an abject failure,” but it brought “important new commitments and initiatives” from both the public and private sectors that, combined, “could open up opportunities for climate-oriented investors,” they say.
Hallett says that, among experts and attendees he spoke to, a common reaction was “a real desire to look on the bright side, combined with some weary disappointment and frustration. Good but not good enough.”
There were certainly some good things that optimists can point to coming out of COP26. India committed to going net-zero, though not until 2070. More than 100 countries agreed to a 30% reduction in methane emissions by 2030. A similar number agreed to halt deforestation by that same year.
More than 450 investors, asset managers, banks and insurers with a combined $130 trillion in assets formed the Glasgow Financial Alliance for Net Zero (GFANZ), aimed at getting the financial industry – and the projects it supports – to net-zero. The US joined the UK in backing the new Capital Market Mechanism from Climate Investment Funds, which is meant to raise hundreds of millions of dollars per year for clean energy and sustainable infrastructure projects.
And almost 200 countries agreed to the Glasgow Climate Pact, agreeing to “significantly increase their climate commitments in line with the Paris targets,” the PIMCO report says. “It is also the first climate deal to directly address the role of fossil fuels – including commitments to ‘phase down’ coal use – while setting broad rules for carbon markets.”
Hallett also points to the “proliferation of collaborative initiatives” across the financial industry, along with “more general acceptance of the need for ambitious 2030 targets, not just 2050.” Initiatives like GFANZ are “starting to provide a comprehensive toolkit for action,” he says.
The outcomes of COP26 also point to some investment areas that could see growth in the near term, PIMCO’s Mather and Power say. Sustainability-linked and green bonds are one such area.
“It’s clear that the climate and green bond market (in addition to the broader sustainability-linked market) is likely set for exponential growth as both sovereigns and corporates are expected to increase issuance to finance net zero and other climate commitments,” they say. “This should offer new opportunities for climate-oriented fixed-income investors, in both developed and emerging market countries.”
PIMCO also thinks sustainable infrastructure, as an asset class, will be a “significant global investment opportunity,” one that could well bring together “development banks and the private sector around what we believe are compelling commercial investment opportunities.”
But for all the good, there were lots of buts. “A key disappointment is that commitments made to date still leave us way off track on climate goals,” the Schroders report says.
Countries agreed to reassess their nationally determined contribution targets next year instead of 2022. That itself is good news, Hallett says, though he notes that “the need for it reflects insufficient ambition in the current targets.” And, he adds: “There is no sign of most nations implementing credible implementation strategies for even their existing targets anytime soon.”
Another disappointment was around the “phasing” of coal; the final agreement saw the words “phase out” watered down to just “phase down.” The Schroders executives note that such “‘constructive ambiguity’ is often needed to get international agreements over the line, but given the scale of the climate emergency we face, it is very disappointing that countries couldn’t take a firmer line here.”
And, Webber and Hervey-Bathurst add, the Glasgow net-zero alliance “includes some banks which continue to finance new oil exploration and production projects.”
Now that COP26 delegates have returned home, it’s up to investors, companies and governments to step up their efforts to reduce emissions. “That means it’s back to looking at the policy details, of which there are plenty,” the Schroders report says. “In the next few months, we will see if the U.S. can pass its climate bill. If they do, then this would be the biggest near-term catalyst for climate change investing.”
In the meantime, asset owners are doing what they can. Earlier this year, a dozen investment consultants, including Cambridge, launched the Net Zero Investment Consultants Initiative, a group meant to help guide pensions and other investors toward net-zero portfolios. “We are already seeing an exponential increase in clients saying, ‘Please come and talk to us about [net-zero], and when we raise the topic proactively the door is open, more often than not,” Hallett says.
For MSCI, a key takeaway from COP26 was around making sure that investors have access to the best and most complete data about what companies are doing with their emissions, and other sustainability measures.
“We must address climate change now, and everyone must do their part,” Lee says. “With the right measures and disclosures, investors can do what they do best: allocate capital efficiently to fund the companies of the future that will benefit their portfolios by helping us live more sustainably.”